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First Department Sustains Connecticut Unfair Trade Practices Act and Other Claims Against Subsidiaries and Officers of Lehman Brothers Based Upon An Allegedly Improper Asset Substitution on the Eve of the Lehman Brothers Collapse

In Aetna Life Insurance Company v. Appalachian Asset Management Corp, et al., 2013 Slip Op 05506 (1st Dep’t July 30, 2013) the Appellate Division affirmed the April 13, 2012 decision of the New York County Supreme Court, Commercial Division (Ramos, J.), which sustained claims by Aetna Life Insurance Company (“Aetna”) for beach of the Connecticut Unfair Trade Practices Act (“CUTPA”), breach of fiduciary duty, negligence, and recklessness against certain wholly-owned subsidiaries of Lehman Brothers Holding, Inc. (“LBHI”) and individuals acting on behalf of those companies (collectively, the “Defendants”).

In its complaint, Aetna alleged that in the days leading up to the collapse of LBHI the Defendants withdrew assets from a trust account held for Aetna’s benefit and replaced those assets with securities backed by subprime residential mortgage loans. While one of the LBHI subsidiaries, Lehman Re, was authorized to withdraw assets from the trust account without Aetna’s approval, those assets were to be replaced with other qualified assets. Aetna further alleged that the transaction at issue was authorized by high-ranking officers at LBHI and designed to relieve LBHI of the toxic assets substituted into the Aetna trust account and make LBHI’s financial position appear stronger than it actually was. In response to a handful of motions to dismiss by the Defendants, the Supreme Court sustained all claims except for the negligence claims against the individual defendants.

The First Department initially considered whether the CUTPA claim could be maintained given these facts because the CUTPA does not apply to the purchase or sale of securities, which are instead governed by the Connecticut Uniform Securities Act (“CUSA”). The Court held that, at the pleading stage, it could not determine whether the substitution of the securities in the Aetna trust account fell under the CUSA as a sale or was encompassed by the CUTPA. Therefore, the Court went on to consider whether Aetna had sufficiently plead the claim. In considering Aetna’s allegations, the Court found that CUTPA does not require claims to be plead with particularity and that Aetna’s allegations were sufficient in that they “assert more than mere negligence in making a trade; they assert conduct that surely may be deemed unscrupulous, unfair, and violative of the public policy ‘as it has been established by’ Connecticut insurance law and regulations.” The First Department further found that the individual defendants could be held liable under CUTPA if they directly engaged in the tortious conduct that gave rise to Aetna’s injury.

The First Department went on to sustain breach of fiduciary duty claims against certain LBHI subsidiaries and aiding and abetting breach of fiduciary duty claims against the individual defendants. The Court found that Aetna’s allegations that each individual knew of the substitution of the trust assets, that the substation was improper, and that each individual played some role in the substitution were sufficient to plead an aiding and abetting breach of fiduciary duty claim. The question of whether each individual’s conduct represented substantial assistance sufficient to establish an aiding and abetting claim could not be determined on a motion to dismiss. The Court also sustained Aetna’s negligence and recklessness claims against the LBHI subsidiaries and held that the individual defendants may be found liable under Connecticut law based upon the “allegations that each of these individual defendants took actions in connection with the substitution that they knew were not reasonably prudent with respect to the management of the trust assets.”

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